<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1995
Commission File Number 0-20734
NORRIS COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada None
----------------------- ----
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
12725 Stowe Drive, Poway, California 92064
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(619) 679-1504
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<S> <C>
Common Stock, without par value 15,103,703
- ------------------------------- ----------
(Class) (Outstanding at February 12, 1996)
</TABLE>
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NORRIS COMMUNICATIONS CORP.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and
and March 31, 1995 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended December 31, 1995 and 1994 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1995 and 1994 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
* No information provided due to inapplicability of the item.
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1995
$ $
--------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash 1,377,798 3,291,203
Accounts receivable, less allowance for doubtful
accounts of $190,499 and $210,000, respectively 372,549 152,673
Inventory (note 3) 3,425,847 2,663,403
Prepaid expenses and other 426,721 396,644
------------------------------
TOTAL CURRENT ASSETS 5,602,915 6,503,923
Property and equipment, net 1,411,301 1,742,796
Purchased goodwill, net of accumulated amortization of
$376,200 and $309,646, respectively 288,401 354,955
Other intangible assets, net of accumulated amortization of
$23,795 and $17,451 respectively 54,551 56,958
------------------------------
TOTAL ASSETS 7,357,168 8,658,632
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Convertible note payable (note 4) 2,703,646 3,000,000
Accounts payable, trade 2,185,305 1,234,574
Other accounts payable and accrued liabilities 81,050 410,539
Current portion of capital lease obligations 168,984 193,229
------------------------------
TOTAL CURRENT LIABILITIES 5,138,985 4,838,342
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 30,000,000
shares; 15,103,703 and 11,616,814 shares outstanding,
respectively (note 5) 21,762,337 17,849,751
Contributed surplus 1,592,316 1,592,316
Deficit (21,136,470) (15,621,777)
------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,218,183 3,820,290
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 7,357,168 8,658,632
==============================
</TABLE>
See notes to interim consolidated financial statements
3
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NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1995 1994 1995 1994
$ $ $ $
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES 573,095 1,134,074 1,379,698 3,568,078
Cost of sales 1,074,342 1,301,028 3,266,747 4,268,910
---------- ---------- ---------- ----------
Gross loss (501,247) (166,954) (1,887,049) (700,832)
---------- ---------- ---------- ----------
OPERATING EXPENSE (INCOME)
Selling and administrative 924,793 897,057 2,620,525 3,344,166
Research and related expenditures 139,679 393,910 743,769 726,998
Interest expense 109,051 128,159 290,991 199,631
Interest income (7,232) (848) (27,641) (1,599)
---------- ---------- ---------- ----------
1,166,291 1,418,278 3,627,644 4,269,196
---------- ---------- ---------- ----------
Operating loss (1,667,538) (1,585,232) (5,514,693) (4,970,028)
Provision for income taxes (note 7) -- -- -- --
---------- ---------- ---------- ----------
NET LOSS (1,667,538) (1,585,232) (5,514,693) (4,970,028)
========== ========= ========== =========
Net loss per share (note 9) (0.12) (0.21) (0.45) (0.65)
========== ========= ========== =========
Weighted average shares 13,748,152 7,706,814 12,381,062 7,605,147
========== ========= ========== =========
</TABLE>
See notes to interim consolidated financial statements
4
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NORRIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31
1995 1994
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss ($5,514,693) ($4,970,028)
Adjustments to reconcile net loss to net cash
used by operating activites:
Depreciation and amortization 373,049 380,469
Loss from sales of assets 38,550 109,120
Changes in assets and liabilities:
Accounts receivable (219,876) 236,176
Inventory (762,444) (782,495)
Prepaid expenses and other (30,077) (341,686)
Accounts payable, trade 950,731 940,571
Other accounts payable and accrued liabilities (329,489) 8,834
---------- ----------
Cash (used in) operating activities (5,494,249) (4,419,039)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (35,506) (171,632)
Proceeds on sale of assets 28,300 135,500
Investment in patents and intangibles (3,937) (27,933)
---------- ----------
Cash (used in) investing activities (11,143) (64,065)
---------- ----------
FINANCING ACTIVITIES
Advances (payments) on note payable (296,354) 3,220,000
Principal payments on capital lease obligations (24,245) (52,368)
Repayment of note payable -- (31,250)
Proceeds from issuance of shares - net 3,912,586 1,720,621
---------- ----------
Cash provided by financing activities 3,591,987 4,857,003
---------- ----------
Net increase (decrease) in cash (1,913,405) 373,899
Cash, beginning of period 3,291,203 1,459,526
---------- ----------
Cash, end of period $1,377,798 $1,833,425
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the year for:
Interest $290,991 $199,631
</TABLE>
See notes to interim consolidated financial statements
5
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NORRIS COMMUNICATIONS CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1995
1. OPERATIONS
Norris Communications Corp. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and on November 22, 1994, changed
its domicile from British Columbia to the Yukon Territory, Canada. The Company
is engaged through its wholly-owned subsidiary in the development, manufacture
and marketing of electronic products and exploiting proprietary technology.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCI"), based in San Diego County, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flows from operations
in six of its past seven fiscal years and for the nine month period ended
December 31, 1995. The Company's ability to continue as a going concern is in
substantial doubt and is dependent upon obtaining additional financing and
achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information. They do not include all information and footnotes
required by generally accepted accounting principles. The interim consolidated
financial statements and notes thereto should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
year ended March 31, 1995.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the nine
month period ended December 31, 1995 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1996. The interim
consolidated financial statements and notes thereto are stated in U.S. dollars.
3. INVENTORY
Inventory is valued at the lower of cost or market, but not in excess of net
realizable value. Cost is determined on a first-in, first-out basis. Inventories
consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1995
----------------- --------------
<S> <C> <C>
Raw materials $ 1,940,531 $1,396,112
Work in process 169,001 444,192
Finished goods 1,316,315 823,099
- -------------------------------------------------------------------------------
$ 3,425,847 $2,663,403
===============================================================================
</TABLE>
6
<PAGE> 7
NORRIS COMMUNICATIONS CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1995
4. CONVERTIBLE NOTE PAYABLE
The convertible note payable is due to a finance company and bears interest at
prime plus 2%. On February 1, 1996 the Company renegotiated the due date of the
note to April 30, 1996 with a $33,155 extension fee added to the principal of
the note. The note and any accrued interest is convertible into common shares at
$1.50 per share subject to adjustment on default. The note is collateralized by
a first security interest covering accounts receivable, inventory, property and
equipment, and other assets, and a specific pledge of the Company's shares in
JABRA (see Note 8).
5. COMMON STOCK
The following table summarizes shares issued during the period ended December
31, 1995:
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Balance, March 31, 1995 11,616,814 $17,849,751
Stock options exercised 15,000 30,303
Stock issued for debt 304,175 440,748
Stock issued for cash 3,167,714 3,441,535
- -------------------------------------------------------------------------------
Balance, September 30, 1995 15,103,703 $21,762,337
===============================================================================
</TABLE>
6. OPTIONS AND WARRANTS
At December 31, 1995 warrants and stock options were outstanding/exercisable
into the following listed shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Cdn. $ Expiration Date
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrants 115,000 3.76 * February 1996
Warrants 200,000 2.00 * September 1998
Warrants 450,000 1.75 * June 1999
Warrants 33,750 4.00 * June 1999
Warrants 82,100 4.00 * August 1999
Warrants (1) 106,986 2.01 * February 2000
Warrants (1) 88,014 2.01 * March 2000
Warrants (1) 134,667 1.91 * October 2005
- ----------------------------------------------------------------------------
Total 1,210,517
============================================================================
Stock options 56,000 3.65 * August 1996
Stock options 15,000 2.00 * September 1996
Stock options 2,000 4.41 6.01 January 1997
Stock options 60,000 3.38 * April 1997
Stock options 287,818 2.09 2.84 August 1997
Stock options 100,000 2.00 * September 1997
Stock options 150,000 1.50 * October 1998
Stock options 181,000 2.09 2.84 November 1998
Stock options 129,840 3.65 * August 1999
Stock options 512,000 3.38 * April 2000
- ----------------------------------------------------------------------------
Total 1,493,658
============================================================================
</TABLE>
* These warrants and options are denominated in U.S. dollars. All other
options are denominated in Canadian dollars with the U.S. dollar
equivalent computed at the exchange rate in effect on December 31,
1995. (1) These warrants, amongst other provisions, contain a provision
for adjustment for dilutive events. The exercise prices and where
applicable, the number of warrants, have been adjusted to reflect any
such events through December 31, 1995.
7
<PAGE> 8
NORRIS COMMUNICATIONS CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1995
7. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $8,028,000 and $4,285,000 for federal and state tax purposes,
respectively, subject to certain limitations arising from changes in ownership.
8. INVESTMENT IN JABRA CORPORATION
The Company owns 1,800,000 common shares of JABRA or 23.2% (1994-1,800,000
common shares or 33.5%) of JABRA's common shares. Effective July 15, 1993, JABRA
has been accounted for under the cost method and at December 31, 1995 the
carrying value was nil. In connection with the convertible note payable (see
Note 4) the Company has granted the financial institution an option to purchase
300,000 of the JABRA common shares at option price of $1.50 per share until July
31, 1997.
9. NET LOSS PER SHARE
The net loss per share is calculated using a weighted average number of common
shares and common stock equivalents outstanding for the period. Common
equivalent shares consisting of outstanding stock options, warrants and the
convertible note have been excluded because their effect would be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Prior to the introduction of the FLASHBACK recorder in December 1994, the
revenues of the Company were generated by contract manufacturing. Contract
manufacturing accounted for over 90% of total revenues in fiscal 1995. As a
result of the reduction of outside contract manufacturing services, the
reconfiguration of manufacturing to accommodate the production of FLASHBACK
proprietary products, i.e. FLASHBACK and accessories, the sale of FLASHBACK
products accounted for the majority of revenues for the nine months ended
December 31, 1995. As a result of the reduced emphasis on contract manufacturing
and greater emphasis on proprietary product manufacturing and sales, comparisons
to prior results is less meaningful and prior results are not necessarily
indicative of future results.
The Company has incurred operating losses in six of its past seven years and
these losses have been material. The Company incurred an operating loss of $7.1
million in fiscal 1995. This resulted from the development and launch of the
FLASHBACK and losses incurred in reducing contract manufacturing operations in
preparation of FLASHBACK production. Since future results are dependent on
proprietary product (FLASHBACK and new products scheduled for introduction)
results, the Company's losses are expected to continue until such time as the
Company is able to manufacture and sell quantities of proprietary products at
sufficient margins to cover fixed costs of operations. Should the Company be
unable to accomplish the foregoing and operate profitably, the Company may be
forced to reduce or curtail operations. The Company continues to be subject to
the risks normally associated with any new business activity, including
unforeseeable expenses, delays and complications. Accordingly, there is no
assurance the Company can or will report operating profits in the future.
8
<PAGE> 9
Since the Company utilizes its own facility and equipment for the manufacture of
proprietary products, gross margins are especially dependent upon sales volumes
as a result of a substantial fixed manufacturing overhead. The Company estimates
that its monthly fixed cash operating costs approximate $350,000 per month. At
low sales volumes it is unlikely that positive gross margins from proprietary
products can be achieved, however at higher volumes the allocation of fixed
costs over more sales can result in increasing gross margins. Accordingly, the
Company anticipates variances in gross margins from quarter to quarter in future
quarters as production is still in the early stages and product sales volumes
can vary as the various distribution channels are launched and as a result of
seasonal and other factors associated with the sale of consumer electronic
products.
Sales of and demand for the Company's FLASHBACK recorder have not met
management's expectations due to a variety of factors including competitive
pressure in the portable recording industry and insufficient financial resources
to differentiate the product from competitors. The Company has responded by
changing distribution channel emphasis to the high end business markets, by less
reliance on outside sales representatives through the hiring of a director of
sales and marketing and by educating retailers and customers on the differences
between FLASHBACK and less expensive memo recorders. The scheduled introduction
of the Company's SOUNDLINK computer peripheral in the first fiscal 1997 quarter
is expected to open new channels of distribution and further differentiate the
Company's product offerings. Sales are expected to be subject to significant
month to month variability resulting from the limited market penetration
achieved to date, the impact of new product introductions and the seasonal
nature of demand for consumer electronic products. The markets for consumer
electronic products are subject to rapidly changing customer tastes and a high
level of competition. Demand for the Company's products is expected to be
influenced by marketing and advertising expenditures, product positioning in
retail outlets, technological developments and general economic conditions.
Because these factors can change rapidly, customer demand can also shift
quickly. The Company may not be able to respond to changes in customer demand
because of the time required to change or introduce products, production
limitations and limited financial resources.
On November 10, 1995, the Company announced an original equipment manufacturer
(OEM) sales division had been created to meet the demand for the FLASHBACK
technology. The three goals are to (1) license the microprocessor and software,
(2) design and manufacture custom products, and (3) offer private label branding
of current Company products. Also, the Company announced the availability of the
Norris FlashFile System as a development tool for individuals and companies
preparing to use Flash memory in their systems and/or products. Norris' system
stores and manipulates data using a file manager API (application programming
interface), and supports compressed voice, image, or video as well as
conventional file data. The Company anticipates, but there can be no assurance,
that OEM revenues will become a significant component of future revenues of the
Company.
Results of Operations
For the first nine months of fiscal 1996, the Company reported revenues of $1.3
million, 62% less than revenues of $3.6 million for the first nine months of
fiscal 1995. Revenues for the third quarter of fiscal 1996 were $0.6 million
compared to $1.1 million for the comparable quarter of fiscal 1995. The decrease
in revenues is due to FLASHBACK sales not meeting expectations and not achieving
sales levels comparable to prior contract manufacturing revenues. Fiscal 1996
revenues are primarily from sales of FLASHBACK. Fiscal 1995 revenues were
primarily from the operations of the contract manufacturing business. A
substantial portion of the Company's FLASHBACK revenues have been derived from a
limited number of customers. The loss of certain large customers or a decline in
the economic prospects of such customers would have a further adverse effect on
the Company.
For the first nine months of fiscal 1996, the Company reported a gross loss of
$1.9 million or 143% of revenues, as compared to a gross loss of $0.7 million or
20% for the first nine months of fiscal 1995. Gross loss was $0.5 million in the
third quarter of fiscal 1996, compared to a gross loss of $0.16 million in the
third quarter of fiscal 1995. During the first nine months of fiscal 1996, the
decrease in gross profit was due to the Company's reduction of contract
manufacturing and minimal sales of the FLASHBACK while fixed manufacturing
overhead related to cost of sales plus the cost of product exceeded the revenues
generated by sales of FLASHBACK. Also in the first quarter of fiscal 1996 cost
of sales included $980,000 representing the cost of 7,000 discontinued FLASHBACK
units sold to Active Media Services, Inc., an independent media trading firm.
These units were sold in exchange for $1,172,500 of media trade credits. The
Company recognized no prepaid asset nor any revenue in connection with the trade
credits since their use requires certain matching cash payments and
9
<PAGE> 10
the Company's ability to continue as a going concern is in substantial doubt.
Management believes the credits have very limited future value in planned
operations and intends to recognize future revenue from the trade credits only
when ascertainable economic value is realized from their use.
During the first nine months of fiscal 1995, sales were from contract
manufacturing, with high manufacturing costs due to FLASHBACK startup costs and
low margin turnkey and consignment orders and an increased mix of through-hole
printed circuit boards which required more hand placement of components (which
increased labor costs with no corresponding increase in revenues). Due to the
Company's high manufacturing overhead, the Company expects to report gross
losses until product sales and/or margins improve sufficiently to cover
manufacturing overhead. The Company's strategies to produce positive margins
includes increasing volume of existing products and adding new products,
improving pricing, reducing manufacturing costs, obtaining additional contract
manufacturing business, and obtaining new revenues from the OEM division. There
can be no assurance the Company can achieve positive gross margins.
Total operating expenses (including research and related expenditures, selling
and administrative and interest expense less interest income) were $1.2 million
for the third quarter of fiscal 1996 as compared to $1.4 million for the third
quarter of fiscal 1995. For the first nine months of fiscal 1996, operating
expenses were $3.6 million, as compared to $4.3 million in fiscal 1995.
Operating expenses for the nine months decreased by $0.68 million primarily due
to a concerted effort to reduce expenses, while manufacturing and selling the
FLASHBACK. The material changes and reasons for the changes from the first nine
months of fiscal 1996 compared to the first nine months of fiscal 1995 were: a
decrease in legal fees and settlements of $380,000 (the decrease was due to a
reduction of settlements and legal fees being paid in the current fiscal year),
a decrease in salaries of $100,000 (the Company reduced staffing due to
financial constraints), a decrease in finders fees of $130,000 (a large line of
credit was established in the prior year where a finders fee was paid), a
decrease in public relations of $60,000 (the Company has reduced outside public
relations internally assuming many of these duties), and a reduction of other
advertising, promotions and trade show expenses of $80,000 (associated with the
prior year new product launch), offset by an increase associated with a $120,000
refinancing fee on the convertible note. Research and development costs
(associated with new product development) were $140,000 for the third quarter of
fiscal 1996, as compared to $394,000 for the third quarter of fiscal 1995 which
included intensive pre- FLASHBACK launch development costs. For the first nine
months of fiscal 1996, research and development costs were $744,000, compared to
$727,000 for the first nine months of fiscal 1995. The research and development
associated with new products, although subject to quarterly variations, are
expected to continue at recent quarter levels.
The Company reported an operating loss of $1.7 million for the third quarter of
fiscal 1996, as compared to an operating loss of $1.6 million for the third
quarter of fiscal 1995. For the first nine months of fiscal 1996, the Company
reported an operating loss of $5.5 million, as compared to an operating loss of
$5.0 million for the first nine months of fiscal 1995.
Liquidity and Capital Resources
At December 31, 1995, the Company had working capital of $0.4 million, compared
to working capital of $1.7 million at March 31, 1995. The Company had
approximately $3.4 million of working capital invested in inventories at
December 31, 1995, compared to approximately $2.7 million at March 31, 1995 with
the increase due to FLASHBACK components. The decrease in working capital is a
result of the Company's continuing losses which consumed working capital during
the period. The Company exhausted its available credit under its credit line
which was converted to a fixed note, as discussed below. Approximately $1.8
million in cash was used in operating activities by the Company in the quarter
ended December 31, 1995 and management estimates that approximately $1.3 million
cash will be expended in operating activities in the quarter ending March 31,
1996. The Company's current cash position is insufficient to enable the Company
to meet either its obligations to creditors or its on-going expenses beyond
approximately two months.
On October 17, 1995, the Company executed a Loan Modification Agreement with CVD
Financial Corporation ("CVD"), regarding the line of credit. The Loan
Modification Agreement, which had an effective date of August 1, 1995, provided
for (i) the extension of the maturity date of the loan (the "Loan") to January
31, 1996, (ii) a reduction in the interest rate charged by CVD from prime rate
plus seven percent (7%) to prime rate plus two percent (2%), (iii) the waiver by
CVD of certain events of default which had occurred, (iv) the issuance of 75,000
shares of the Company's common stock, to CVD, (v) the issuance of a new warrant
to CVD to purchase 200,000
10
<PAGE> 11
shares of Common Stock at $2.00 per share, (vi) the repricing of existing
warrants to purchase 450,000 shares of Common Stock to $1.75 per share, (vii)
the issuance of an option to acquire up to 300,000 shares of JABRA Corporation
("JABRA") common stock at a price of $1.50 per share, (viii) the grant of
certain conversion rights to CVD to enable CVD to convert at anytime prior to
repayment all or any portion of the outstanding principal balance of the Loan
(including accrued but unpaid interest) into shares of Common Stock at the
lesser of (a) $1.50 per share or (b) following the occurrence of an event of
default, the higher of $1.00 per share and the average closing price for the 20
days preceding the date of notice of an event of default, and (ix) in the event
CVD becomes the holder of not less than 1,000,000 shares of Common Stock, to
nominate and appoint one director to the Company's board of directors.
Substantially all of the assets of the Company and its subsidiary (including
JABRA shares) are pledged to CVD as collateral for the amounts loaned and the
Company is prohibited from incurring additional indebtedness without CVD's prior
consent. In addition, as a result of the Loan Modification Agreement, the loan
is now non-revolving (i.e. no additional funds may be borrowed prior to
maturity) and 33% of the net proceeds from any equity financing must be used to
pre-pay the loan.
On October 17, 1995, the Company paid CVD $429,000, reducing the outstanding
principal balance of the note to $2,703,646. On January 8, 1996, the Company
made an additional $518,100 principal payment on the note. On February 1, 1996
the Company obtained an extension of the convertible note to April 30, 1996 in
consideration of an extension fee of $33,155 which was added to the principal
balance of the note.
Accordingly, the Company will require additional capital (and a replacement or
refinancing of the CVD note) within the next three months to meet its debts as
they become due and to continue as a going concern. The Company will also
require additional working capital to finance production and sales of its
proprietary products. Successful commercialization of proprietary products and
the introduction of the SOUNDLINK will require additional working capital. The
Company estimates that at current expenditure levels and projected working
capital requirements it will require a minimum of an additional $3.5 million (in
addition to the $2.2 million required to refinance the CVD note) to continue
operating for the next twelve months without any contribution from operations.
The existing business may be able to generate some of the additional $3.5
million required depending on proprietary product results, success in obtaining
contract manufacturing business and the ability of the OEM division to generate
revenues, however there can be no assurance thereof. The Company is currently
pursuing various alternatives to meet its needs for additional capital and
refinancing of existing debt. There can be no assurance the Company will be
successful and any such financing may be dilutive to current shareholders. The
failure to refinance existing debt or raise additional funds could have a
material adverse effect on the Company and could force the Company to reduce or
curtail operations.
The Company may, from time to time, seek additional funds through additional
lines of credit, public or private debt or equity financing. The Company might
require additional capital to finance future developments, new products,
production, marketing, acquisitions or extraordinary expansion of facilities in
accordance with its business strategy. There can be no assurances that
additional capital will be available when needed.
Changes in Cash
For the nine months ended December 31, 1995, net cash decreased $1.9 million.
Cash used in operating activities was $5.5 million. Major components using cash
were a net loss of $5.5 million, increase in inventory of $0.8 million, an
increase in accounts receivable of $0.2 million and an decrease in other
accounts payable of $0.3 million. The increase in inventory resulted from a
build-up of finished goods and raw materials and receivables increased from new
sales. Major components providing cash were an increase in accounts payable of
$1.0 million and depreciation and amortization of $0.4 million. The major
component of cash provided by financing activities was proceeds from issuance of
shares of $4.0 million.
Future Commitments and Financial Resources
The Company's future commitments are related to its capital and operating leases
(see audited financial statements for the fiscal year ended March 31, 1995).
These commitments are included in the cash requirements discussed above.
The Company is committed to purchase orders providing for the future delivery of
components in accordance with production schedules. Generally, these orders may
be canceled or extended should production schedules change, however, purchase
orders for customized components often involve vendors less willing to cancel
11
<PAGE> 12
purchase orders although generally open to extensions or modifications which are
common to the industry. Since the Company's production schedules have been
extended, should production be further curtailed or cease, then the Company
could become liable for outstanding purchase orders and the liability could be
material.
If in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or extraordinary expansion of
facilities. The Company currently has no plans, arrangements or understanding
regarding any acquisitions.
Possible Inability to Continue as a Going Concern.
The Company has suffered recurring losses from operations. This factor, in
combination with (i) the Company's exhaustion of its credit line which was
converted to a note, (ii) the Company's prior reliance upon debt to fund the
continuing, increasing losses from operations and cash flow deficits, (iii)
substantial inventory buildup during fiscal 1995 and fiscal 1996 consisting of
raw materials, components and finished product to be utilized in the manufacture
and sale of its FLASHBACK product and material decline in inventory turnover,
(iv) materially increased net losses and cash flow deficits from operations
during fiscal 1995 and first nine months of fiscal 1996 and (v) the likelihood
that the Company may be unable to meet its debts as they come due, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain adequate financing and achieve a level of revenues adequate to
support the Company's capital requirements, as to which no assurance can be
given. In the event the Company is unable to continue as a going concern, it may
elect or be required to seek protection from its creditors by filing a voluntary
petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy. To date, management has not considered this alternative, nor does
management view it as a likely occurrence.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed the Company and its former President were defendents in
an action filed in April 1995 in the Superior Court of the State of California
for the County of San Diego by Homer Lesihau. Mr. Lesihau alleged among other
claims breach of contract and unjust enrichment as it relates to work he
performed for the Company. By agreement dated January 18, 1996, the complaints
and the Company's crosscomplaints were agreed to be dismissed, without
prejudice, for nominal consideration to paid by the Company.
Item 3. Defaults Upon Senior Securities
Prior to the execution of the Loan Modification Agreement with CVD Financial
Corporation("CVD") dated October 17, 1995 as described in Item 2, certain events
of default had occurred, including failure to make principal and interest
payments, which were waived by the agreement. By an additional Loan Modification
Agreement dated February 1, 1996 the due date of the note was extended from
January 31, 1996 to April 30, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following is an index of Exhibits previously filed with Form
10-QSB for the quarter ended December 31, 1995 dated February 11, 1996::
10.5.8 Loan Modification Agreement between the Company and CVD
Financial Corporation dated February 1, 1996.
10.5.9 Amended and Restated Promissory Note between the Company and
CVD Financial Corporation dated February 1, 1996
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the fiscal quarter
ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C> <C>
Date of Report Items Reported Description
- -------------- -------------- -----------
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
October 27, 1995 Item 5 - Other Events Loan modification agreement and terms
November 13, 1995 Item 5 - Other Events Private placement of 1,280,667 common shares
December 22, 1995 Item 5 - Other Events Private placement of 1,600,000 common shares
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORRIS COMMUNICATIONS CORP.
Date: June 11, 1996 By: /s/Kathleen E. Terry
--------------------
Kathleen E. Terry
Chief Financial and Operating Officer
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
UNAUDITED RESTATED INTERIM STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) QUARTERLY REPORT
ON FORM 10-QSB1A FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,377,798
<SECURITIES> 0
<RECEIVABLES> 563,048
<ALLOWANCES> 190,499
<INVENTORY> 3,425,847
<CURRENT-ASSETS> 5,602,915
<PP&E> 1,411,301
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,357,168
<CURRENT-LIABILITIES> 5,138,985
<BONDS> 0
0
0
<COMMON> 21,762,337
<OTHER-SE> 1,592,316
<TOTAL-LIABILITY-AND-EQUITY> 7,357,168
<SALES> 1,379,698
<TOTAL-REVENUES> 1,379,698
<CGS> 3,266,747
<TOTAL-COSTS> 3,364,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290,991
<INCOME-PRETAX> (5,514,693)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,514,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,514,693)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
